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Are You a "Feel-Good Investor"?
That’s not a bad thing. “Feel -Good” investors buy stocks because they feel good about either the stocks or the companies that have issued them.
“Feel-Good” investors are motivated by emotion, not by any financial acumen.
That’s not a bad way to select stocks. It may not be optimal, and it may not be the most profitable, but its not a bad way.
Let me tell you about an experiment done a number of years ago.
A group of researchers wanted to see just how random stock picking really is.
They “commissioned” a monkey to throw darts at a financial stock page.
They then followed the companies the monkey “selected.”
After following those randomly selected companies for a year, they concluded that the monkey-picked companies performed better than the S&P 500!
That’s a really scary thought: randomly pick a bundle of stocks and you can beat the market!
Which shows that the market, in general, can be seen as a random collection of random events.
Our challenge is “How to profit from those seemingly random events?”
The companion task is “When to Sell?”
You don’t make money unless you sell a stock. Merely holding on to a stock that’s rising may make your net worth look good on paper, but you can’t take that paper to the grocery store and buy dinner!
Only when you sell. Or if you collect dividends from those stocks.
Now we have two tasks ahead of us:
- What stocks to buy?
- When to sell those stocks?
Another general rule is: “Don’t plan to hold those stocks Forever.” Nothing lasts forever. All you can do is to maximize your returns.
Another thing: the stock market is currently being maintained and controlled by institution investors who control billions of dollars of stock.
You can not beat them.
But you can profit from them.
May I tell you a small story?
A number of years I was trying to “Beat the Table” at the craps tables in Las Vegas. But I had very little money and even less knowledge. I observed that there was one player who had a very large stack of very large-valued chips. And he kept adding to his horde. So I began to emulate his “trades”. When he put chips down, on a position, so did I. When he picked up his position, so did I. And I began to accumulate chips. Not having the foggiest idea of what I was doing, I was actually earning money!
Then, thinking I knew something about craps, I went to another table, and you guessed it, put it all back into the casino’s pocket, plus a few more!
Moral? Don’t try to second guess the experts. But you can profit by following them.
This leads to my first observation about the stock market: Because of the phenomenon of “Beginner’s Luck”, amateurs may do better than the average individual investor.
As your knowledge grows, so, too, does your unfounded confidence, and you can soon find yourself making [hindsight] horrible decisions. Until you become as savvy as the Institutional Investor, you may be bound to fail.
Even the professionals don’t get it right all the time. Look at how many “professional” hedge fund managers have gone out of business. Look at how many stock traders have lost their collective rear ends.
And, on the other side, look how many multibillion dollar houses have been bailed out because they were “too big to fail”.
So, my advice to you is, create a set of trading rules that work for you. Follow them religiously, until they begin to fail you. Make adjustments as necessary.
Selected correctly, trading rules don’t fail: the principles are universal, but they must be scrupulously followed.
My personal trading rules are very simple:
- Select dividend-paying stocks according to a set of fixed parameters.
- Set “sell” rules according to rigid parameters.
- Set trailing stop loss orders to protect your gains.
- Remove emotion from your trades as much as possible. Never fall in love with a stock.
Do my rules work for me? Yes. My goal is to achieve a monthly dividend income of $2,500 before taxes in less than ten years. After only five years of trading my way, I have achieved a monthly dividend income of $1,800. I’m on target to achieve my goal.
My starting dividend position five years ago was only $208 a month.
Because you have the benefit of my mistakes, you can easily achieve better returns!
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